The market for Non-Fungible Tokens (NFTs) has boomed over the past year. Businesses and asset owners have been creating and selling NFTs representing a range of assets, whether digital or physical, including internet memes, digital images, event tickets and memorabilia.
Notable examples include the sale of an NFT representing the original source code for the World Wide Web, written by the Web's inventor, Tim Berners-Lee, for USD5.4 million, and the first tweet of Twitter's CEO, Jack Dorsey, for USD2.9 million.
This article sets out some of the key legal risks to be aware of for those thinking of investing in NFTs.
What is an NFT?
An NFT is a cryptographic tool which is capable of proving ownership and authenticity of an underlying asset, typically in digital form. Similarly to their cryptocurrency counterparts, such as Bitcoin, NFTs are created (or “minted”) and recorded using blockchain technology. Digital asset and blockchain platforms, such as DLA Piper’s digital asset creation platform, TOKO, can be used to create NFTs. Those NFTs can then be bought and sold on marketplaces that are linked to the underlying blockchain technology.
A fundamental distinction between NFTs and cryptocurrency lies in the fact that NFTs are (as their name states) not “fungible”, meaning each NFT is unique and therefore not interchangeable with any other NFT. Each NFT contains a unique identification and metadata that makes it a one-of-a-kind asset.
The growing interest in NFTs is further driven by the potential for creating new revenue streams. NFTs, and the blockchain technology on which they are founded, offer asset owners the opportunity to generate significant revenues in a new and innovative way, for example, by creating and selling fractions of assets as digital representations. Assets which would have previously proved difficult - if not impossible - to sell, such as the tweets or the source code referred to above, can be monetised through issuing NFTs. Asset owners can even sell an NFT in respect of the digital representation of a physical asset, while still owning (or separately selling) the underlying asset at the same time.
However, as with any asset class, it is important that investors consider the risks as well as the potential rewards.
Key legal risks of NFTs
Defining ownership rights
As with any other contract of sale, it is crucial that a purchaser of an NFT carefully considers the terms governing the relevant token prior to purchase, including what rights are being acquired and what rights will remain with the seller. While the purchaser of an NFT buys, and then owns, the token, owning an NFT does not equate to owning the underlying asset itself. As such, the purchaser of an NFT will not necessarily enjoy rights such as copyright of the underlying asset, which often remains with the creator of the NFT.